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Analysing Freeze-Out Mergers: A Comparative Study of Legal Provisions in India, South Korea, the UK, and Australia

The cornerstone of modern corporate governance lies in the balance of power between majority and minority shareholders within companies. The precedent established in the landmark case of Foss v. Harbottle has reverberated across jurisdictions, with India closely following the common law rule of the majority. This principle allows majority shareholders to wield significant control over company affairs, largely shielded from judicial intervention.

However, recourse is available to minority shareholders through the National Company Law Tribunal (NCLT) and courts, especially in cases of fraud, mismanagement, oppression, or breach of charter documents by the majority. One avenue for majority shareholders to exert control is through freeze-out mergers, a topic that this article delves into.

We will explore the legal status of freeze-out mergers in India, conduct a comparative analysis with legal provisions in South Korea, the United Kingdom (UK), and Australia, and ultimately assess the global standards of minority shareholder protection.

Legal Status of Freeze-Out Mergers in India:

The pivotal moment in the evolution of freeze-out mergers in India occurred in 2020 when Section 230 of the Companies Act was amended. This amendment introduced sub-sections (11) and (12), collectively known as the "Takeover Notification." With this amendment, the scope of compromise and arrangement was expanded to encompass takeover offers. Concurrently, the Companies (Compromises, Arrangements, and Amalgamations) Amendment Rules, 2020, and the National Company Law Tribunal (Amendment) Rules, 2020 were notified. These amendments enable majority shareholders, holding 75% of voting rights, to file an application with the NCLT to acquire the remaining minority shares.

One of the significant provisions is Rule 3(5) of the Compromises, Arrangements, and Amalgamations Rules. If the NCLT approves the application, majority shareholders can enforce the acquisition of minority shares, effectively squeezing out the minority shareholders. This underscores the shift toward facilitating the majority shareholders' control and reducing the influence of minority stakeholders. Additionally, Section 235 allows for the compulsory acquisition of shares held by dissenting shareholders, contingent on the approval of 90% of shareholders within two months of notice.

Section 236 presents another route for majority shareholders to acquire minority shares. This section grants majority shareholders with at least 90% equity shares the right to acquire minority shares through methods such as amalgamation, share exchange, or conversion of securities. However, the section does not expressly obligate minority shareholders to sell their shares. It's noteworthy that even in the event of a failure to acquire all minority shares, residual minority shareholders are still bound by relevant provisions of the Act.

While the amendments have augmented the rights of majority shareholders, they have also introduced safeguards for minority stakeholders. Section 230(12) empowers aggrieved minority shareholders of unlisted companies to approach the NCLT for grievances related to takeover offers. Moreover, to protect minority shareholders, the amended provisions mandate that the majority shareholders deposit a minimum of 50% of the consideration of the takeover offer into a separate bank account.

In the case of S. Gopakumar Nair v. OBO Bettermann India Private Limited, the National Company Law Appellate Tribunal (NCLAT) provided clarification on the scope of Section 236(1), asserting that "for any other reason" encompasses events akin to amalgamation, share exchange, or conversion of securities. The NCLAT's distinction between Sections 235 and 236 emphasizes the acquisition of shares from dissenting versus assenting shareholders. This illustrates India's attempt to strike a balance between the rights of the majority and the protection of minority interests. Nevertheless, to ascertain whether these efforts align with global standards, a comparative examination of other jurisdictions is essential.

Comparative Jurisdictions:

South Korea:
Article 360-24 of the Korean Commercial Act, 2018, offers a unique perspective on majority-minority dynamics. Here, a majority shareholder with at least 95% ownership can buy out shares held by minority stakeholders. This starkly contrasts with India's Section 235, where 90% majority shareholders acquire shares within four months. While the principle aligns, Indian law stresses greater minority shareholder protection by facilitating NCLT intervention and the submission of mandatory valuation reports.

United Kingdom:
The English Companies Act, specifically Sections 979 and 983, resembles India's approach, enabling acquirers with 90% ownership to buy out remaining shares. Notably, UK law recognizes minority shareholder rights, as seen in the Hellenic and General Trust Ltd case, ensuring equitable outcomes during freeze-out scenarios.

Australia's Corporations Act, governed by the Eggleston principles, prioritizes fairness, equal opportunity, and minority protection. The Act allows minority shareholders to object to a majority resolution in a general meeting, avoiding situations like India's "majority of the minority" dilemma. The case of Cadbury Ltd. vs. State of Maharashtra exemplifies this approach, where independent valuation was ordered upon minority shareholder objection.

Balancing freeze-out concerns requires nuanced strategies that consider both shareholder rights and corporate efficiency. India has embraced amendments to the Companies Act, introducing provisions for freeze-out mergers that empower majority shareholders. While these amendments offer enhanced protections for minority stakeholders, the NCLT process remains intricate and time-consuming. To ensure comprehensive minority shareholder protection, Indian law could evolve by providing greater avenues for challenge and recourse.

By benchmarking against South Korea, the UK, and Australia, India can glean insights into global standards of minority shareholder protection. South Korea's high ownership threshold indicates a different approach, while the UK's recognition of minority rights emphasizes equitable outcomes. Australia's focus on fairness over economic efficiency provides a compelling model for consideration. Ultimately, the Indian legal landscape should continue to evolve, striking a balance between safeguarding minority interests and encouraging corporate growth.

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